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10 THE CHICAGOLAND COOPERATOR —FALL 2019 CHICAGOCOOPERATOR.COM similar,” explains Lisa Wagner, Vice Presi- dent and Business Development Officer with ConnectOne Bank in Englewood, New Jersey. “Existing cash saved in a capital reserve account might be short to fund such a project, or the association might not want to deplete all of those funds, so it will bor- row from a bank.” Jared Tunnell, Senior Vice President of National Cooperative Bank with offices in Virginia, New York, Ohio, and Alaska, cites some more examples of big-budget to-dos: “The largest ones that I’ve seen recently, say, if you’re a townhouse community, have been roofs, siding or stucco. For high- or mid-rise buildings, the big line-items are facades, balco- nies, or HVAC risers.” A responsible board will be aware of the inevitability of these major repair projects, as every- thing from building systems to roofs to facades all face gradual wear and tear. “These projects are often necessary 15-20 years into the existence of a property,” notes Charles F. Withee, President and Chief Lending Officer of the Provident Bank, which has loca- tions in Massachusetts and New Hampshire. “Let’s say that you’re faced with repairing or replacing the roofs and the sid- ing simultaneously. If the former is going to cost you $200,000 and the latter $300,000, and your association is 100 units, you can do the math on a special assessment. That’s a big nut.” “The benefit of borrowing, as opposed to coming up with the money upfront, is that you’re actually using the balance sheet of the community to borrow money, so it doesn’t impact an individual resident on a personal level, or affect personal credit,” ex- plains Tunnell. “They’re using the aggregate value of the community to borrow, as op- posed to a specific unit. And then you can pass on the monthly fee to the next owner. So if you’re dealing with a 50-year-old com- munity with 50-year-old pipes that need to be replaced, various owners have come and gone who have enjoyed those pipes over that time period. Why should a handful of individuals shoulder the burden of coming up with that replacement money up front? Borrowing not only allows them to spread out the payback, but to spread out the re- sponsibility. If a resident isn’t going to be there for another 10 years, then they pay their portion of the project for the five years that they are there, and then they transfer the remainder to the next owner. Many communities see that as a big impact.” From Who?! And How?! Of course, for an association to truly consider taking out a loan, it must first identify a qualified lender with which it can negotiate agreeable terms and come up with a feasible payment plan. And certain crite- ria need to be met on the association’s side, in order for it to prove a viable lendee. “The association will need to have a re- serve account that is being funded,” says Rachel Rowley, a former vice president with Alliance Association Bank in Oswe- go, Illinois. “Most associations want to use their reserves, such that they can take out a lower loan. The reserves are actually what helps them become qualified. Past-due ac- counts can hinder the loan process. For AAB, they can have no more than 10% of their total units over 60 days past due. And they should look for a loan that does not contain a prepayment penalty. A bank will not finance a project for longer than the life expectancy of the product. When the board is looking to take out a loan, they should look at all of the projects that will need to be undertaken during a specific period of time. If they need their roof(s) taken care of now, but may need siding taken care of in two years, it may behoove them to take out a larger loan and complete both projects si- multaneously in order to avoid starting the loan process over again a few years later.” “Most banks, if they are assessing the loan request correctly, will ask for a recent capital reserve study, year-end and interim financials, arrears report, estimates from contractors, and bylaws,” adds Wagner. “We like to see a special assessment put in place by the board for the homeowners to pay the loan. This ensures that the bank will get paid back dollar for dollar by the home- owners. If the association has a problem with collecting management or assessment fees, we would be concerned. If the board doesn’t want to share the idea of a loan and/ or assessment with its owners, this is con- cerning; even if the bylaws state that they do not need approval, we would prefer a vote by the residents anyway. It’s not worth a le- gal battle in the future.” It’s also worthwhile for a board to re- search the banks in the area to ascertain an ill-advised loan transaction, as well as whether one may specifically specialize in problems that can turn a loan sour down association loans, such as many of those the line. mentioned in this article. “If you approach a bank and they ask something like, ‘Oh God, tion is only looking to get a head start on what’s the collateral again?’ -- then you’re capital projects,” warns Rowley. “In those at the wrong bank, because they don’t know cases, they should focus on increasing as- that they’re dealing with a cash-flow loan,” sessments to help them prepare. But an as- warns Withee. “And there are other under- writings to consider; we’re typically dealing a bank can enter into.” with seven-year terms, or possibly 10. We calculate for an association what the debt have borrowed too much money, and it service is going to look like, and what they limits their flexibility to fund projects down need to do is look at the budget to determine the road,” adds Tunnell. “And then from our what they’ll need to raise in dues to cover perspective, what we look at in terms of red that new debt service. From there, you need ments to owners, which could cause them to review the significance of that increase. legitimate cash-flow problems.” If it’s going to be a 30%-40% spike to the condo fee, that could be a real problem. The those that do them all the time, on behalf bank is going to look at the likelihood of the of all parties concerned,” says Withee. “But unit owners having an uprising. There’s no the converse is also true: if you deal with magic number to indicate that, but if the a local bank – and maybe it’s the bank of increase is north of 10%-15%, we’re going the condo president – and they don’t know to need to have a discussion. You can write these things, you’ll have to educate them, beyond that, certainly, but that’s an area that and that’s going to be hard for the board. the board should consider: how this loan The bank will get uncomfortable, then the will affect the condo fee. And an alternative board will get uncomfortable. That discom- is to keep the fee untouched, but then you’ll fort, for a traditional commercial bank, probably have to have an enormous special is going to result in no collateral, and no assessment.” And a board should make sure to com- pare proposed interest rates with market condo fees. But that hypothetical bank fails alternatives, and consider how whichever to realize that the source of repayment is rate it locks in will impact payment consis- tency throughout the duration of the loan. dividuals, and is actually very predictable. “An interest rate may start at 6%, but it var- ies,” Withee continues. “$500,000 at 6% and never lost a penny. They’re always good for seven years is a pretty good proxy for a loans. But you don’t want to have to catch loan on these types of projects. So you do a your banker up to speed, so don’t get hung quick litmus test as to what that will mean up on using a board member’s favorite com- for your condo fees, and make sure it’s not mercial banker. Be very objective. Ask how crazy.” What, Me Worry? So it’s imperative that a board consider to do an association loan. Because, while it’s how much it will have to raise monthly fees not hard, it’s a specialized practice, and your in order to pay off its debt in a timely fash- ion, and whether its residents will reason- ably be able to afford to do so month after month. And there are other red flags that may indicate that a board is entering into “Borrowing is a bad idea if the associa- sociation loan is one of the safest loans that “We’ve seen cases where communities flags are delinquencies – more the number of units than the balance – how many people are not paying. We look at in- vestor-owned units or sublets; we like to see a majority own- er-occupied. In major metro- politan areas, we like to see this number at around 50%.” While it’s fairly unlikely, a mass exodus of unit own- ers could also affect the long- term ability to repay a loan, observes Wagner. “But more likely would be an emergency during the term of the loan that requires additional assess- “These loans are surprisingly simple for tertiary guarantees, which means you es- sentially have one source of repayment: the actually diversified among 100 or more in- We’ve done these loans for a dozen years, many deals they’ve done, and with whom. Make sure the bank is specifically equipped bank needs to be prepared to do it.” n Mike Odenthal is a writer for The Chicago- land Cooperator. CONT... THE BORROWERS continued from page 1 “When the board is looking to take out a loan, they should look at all of the projects that will need to be undertaken during a specific period of time. If they need their roof(s) taken care of now, but may need siding taken care of in two years, it may behoove them to take out a larger loan and complete both projects simultaneously in order to avoid starting the loan process over again a few years later.” — Rachel Rowley